Overview

The European Union Committee undertook this inquiry as the implications of the financial crisis became clear. Supervisors in the UK, in the EU, and globally failed to identify the impending meltdown and failed to take preventative action. Reform of regulation and supervision of the financial system has become an important political topic. In response to the crisis, the European Commission has so far published four regulatory proposals on Capital Requirements, Deposit Guarantee Schemes, Credit Rating Agencies, and Alternative Investment Funds. The first two of these have been agreed and are largely sensible responses to the crisis. The proposals to regulate alternative investment funds and credit rating agencies are more controversial, highlighting the need for more thorough consultation, impact assessment and risk analysis. Further coordination of supervision of the EU financial institutions and markets is seen as necessary and financial services in the EU will benefit from strengthened macro- and micro-prudential supervision. This should provide a more effective early warning system for mitigating systemic risks and help improve the operation of the single market in financial services. The Committee supports the establishment of a new body at the EU level to assess and monitor macro-prudential systemic risks arising from financial markets and institutions. Major strengthening of the powers of any EU micro-prudential body is, though, a matter of some controversy and thorough and careful debate of the alternatives for reform within existing limitations is necessary. The Commission has applied state aid rules speedily and flexibly and has helped ensure that bail-outs of failing banks and mitigation of damage to the real economy do not jeopardise the single market. The accompanying The Future of EU Financial Regulation and Supervision - Volume II: Evidence (HL Paper 106-II) is also available.

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